While there are lots of questions surrounding the sustainability of the stock market advance, there seems to be little resistance ahead for commodities, specifically gold and silver. The U.S. dollar is the primary variable. As you can see from the charts below, gold and silver seem to have no boundaries to the upside. Every time the dollar shows any strength to the upside, it is met with heavy selling and back down it goes. Those same consistent headwinds for the dollar are providing gold and silver with tailwinds and the bulls are taking full advantage. Below are three charts, reflecting the long-term downtrend for the dollar and the major upswing for both gold and silver:
We don't have to guess or try to figure out the reaction in gold and silver. It's very simple. Both will react inversely to the dollar's movement. So if we figure out the dollar, we can figure out commodities. One glance at the long-term picture of the dollar probably tells us all we need to know. If the trend is our friend, then it stands to reason that the dollar's path is downward. That leaves but one option for commodities - higher prices. There will be intermediate periods of dollar strength, which will temporarily cool off commodities. But don't expect any sort of bubble-bursting move to the downside in commodities until the dollar has clearly reversed its downward spiral. I just don't see it happening anytime soon. The Fed has said repeatedly that it will keep interest rates low. Europe has begun to hint that interest rates there need to move higher. That combination alone will keep pressure on our currency.
I would expect the U.S. Dollar Index to fall back to retest the lows in the 70-71 range sometime in 2010. That should provide more opportunity on the long side in commodities. I'd use any short-term weakness as an opportunity to enter your favorite positions within this group on the long side.